An independent review of the big overstatement of oil and gas reserves at
found that some employees used unsupportable methodologies over a four-year period that they should have known were resulting in bad numbers.
On Feb. 17, El Paso slashed its proved reserves by 1.8 trillion cubic feet, or 41%, a move that subsequently triggered a $1 billion charge to earnings and raised analyst concern that more charges were in the offing. On Monday, the law firm of Haynes & Boone laid the responsibility with employees working under El Paso's previous management.
"During the period from the beginning of 1999 through the end of 2003, certain employees used aggressive and, at times, unsupportable methods to book proved reserves," the audit found. "In addition, certain employees provided proved reserve estimates that they knew or should have known were incorrect at the time they were reported."
News of the reserve cut in February halted what had been one of the market's rosier turnaround stories, knocking the stock from a 52-week high of almost $10 to about $7, where it has languished since. The company named former
COO Douglas Foshee to lead the turnaround last July following the ouster of CEO William Wise and pledged to simplify its structure, taking the emphasis of energy trading and selling off non-core assets.
"Independent counsel advised the audit committee that the current senior executive management team of El Paso Corp. did not participate in the inaccurate booking and the resulting overstatement of reserves," the company said in Monday's release. "Independent counsel also advised the Audit Committee that the process conducted to estimate El Paso's proved reserves at Dec. 31, 2003 was sound and that the reserves the company recently announced were estimated in accordance with applicable guidelines."
El Paso outlined a number of initiatives to prevent a recurrence of the problem, including the creation of an internal committee to review reserves, continued use of an outside engineering firm to watch reserves issues, and various audit control procedures.